<PAGE> 1
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended June 27, 1999
Commission file number 0-19924
RARE Hospitality International, Inc.
(Exact name of registrant as specified in its charter)
Georgia 58-1498312
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
8215 Roswell Rd; Bldg 600; Atlanta, GA 30350
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(770) 399-9595
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter three quarters that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
XX Yes No
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Class Outstanding as of August 6, 1999
------ --------------------------------
Common Stock, no par value 12,081,752 shares
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RARE Hospitality International, Inc.
Index
Part I - Financial Information
Item 1. Consolidated Financial Statements
<TABLE>
<S> <C> <C>
Consolidated Balance Sheets as of
June 27, 1999 and December 27, 1998 3
Consolidated Statements of Earnings-
For the quarters and six months ended
June 27, 1999 and June 28, 1998 4
Consolidated Statement of Shareholders' Equity
For the six months ended June 27, 1999 5
Condensed Consolidated Statements of Cash Flows-
For the six months ended
June 27, 1999 and June 28, 1998 6
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14
Part II - Other Information
Item 1. Legal Proceedings 15-16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Securities
Holders 16-17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 17
</TABLE>
<PAGE> 3
Part I. Financial Information
Item 1. Financial Statements
RARE Hospitality International, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share amounts) (Unaudited)
<TABLE>
<CAPTION>
June 27, December 27,
Assets 1999 1998
------ --------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,747 $ 12,060
Accounts receivable 3,069 3,443
Inventories 9,768 9,609
Prepaid expenses 1,009 789
Preopening costs, net of
accumulated amortization -- 2,102
Refundable income taxes 3,081 2,700
Deferred income taxes 7,635 6,932
--------- ---------
Total current assets 27,309 37,635
Property and equipment, less
accumulated depreciation and
amortization 173,134 167,810
Goodwill, less accumulated
amortization 10,558 10,045
Deferred income taxes 1,175 1,490
Other assets 2,883 3,372
--------- ---------
Total assets $ 215,059 $ 220,352
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 14,525 $ 12,423
Accrued expenses 17,331 24,076
--------- ---------
Total current liabilities 31,856 36,499
Debt, net of current installments 39,000 48,000
Deferred income taxes 3,200 2,893
Obligations under capital leases 9,706 9,732
--------- ---------
Total liabilities 83,762 97,124
Minority interest 3,458 2,610
Shareholders' equity:
Preferred stock -- --
Common stock 106,983 105,092
Unearned compensation - restricted
stock (406) (478)
Retained earnings 23,149 16,752
Treasury shares at cost; 144,500 shares in
1999 and 59,500 shares in 1998 (1,887) (748)
--------- ---------
Total shareholders' equity 127,839 120,618
--------- ---------
Total liabilities and shareholders' equity $ 215,059 $ 220,352
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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RARE Hospitality International, Inc. and Subsidiaries
Consolidated Statements of Earnings
(In thousands, except per share data) (Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
Revenues: June 27, June 28, June 27, June 28,
1999 1998 1999 1998
------- ------- --------- --------
<S> <C> <C> <C> <C>
Restaurant sales:
LongHorn Steakhouse $64,098 $51,187 $ 127,467 $104,052
The Capital Grille 13,987 12,082 28,361 23,943
Bugaboo Creek Steak House 13,413 12,044 27,078 24,543
Specialty concepts 1,839 1,688 3,385 3,239
------- ------- --------- --------
Total restaurant sales 93,337 77,001 186,291 155,777
Franchise revenues 54 -- 79 --
------- ------- --------- --------
Total revenues 93,391 77,001 186,370 155,777
------- ------- --------- --------
Costs and expenses:
Cost of restaurant sales 33,393 28,103 66,770 57,391
Operating expenses -
restaurants 42,026 34,357 83,149 69,005
Depreciation and amortization
- restaurants 3,720 3,184 7,357 6,382
Pre-opening expense - restaurants 672 1,206 1,461 2,528
General and administrative
expenses 6,572 5,421 12,859 10,749
------- ------- --------- --------
Total costs and expenses 86,383 72,271 171,596 146,055
------- ------- --------- --------
Operating income 7,008 4,730 14,774 9,722
Interest expense, net 935 627 1,962 1,391
Minority interest 412 285 903 692
------- ------- --------- --------
Earnings before income taxes and
cumulative effect of change
in accounting principle 5,661 3,818 11,909 7,639
Income tax expense 1,850 1,150 3,925 2,300
------- ------- --------- --------
Earnings before cumulative
effect of change in accounting
principle 3,811 2,668 7,984 5,339
Cumulative effect of change in
accounting principle net of
tax benefit -- -- 1,587 --
------- ------- --------- --------
Net earnings $ 3,811 $ 2,668 $ 6,397 $ 5,339
======= ======= ========= ========
Basic earnings per common share:
Basic earnings before cumulative
effect of change in accounting
principle $ 0.32 $ 0.22 $ 0.67 $ 0.45
Cumulative effect of change in
accounting principle -- -- (0.13) --
------- ------- --------- --------
Basic earnings per common share $ 0.32 $ 0.22 $ 0.54 $ 0.45
======= ======= ========= ========
Diluted earnings per common share:
Diluted earnings before
cumulative effect of change in
accounting principle $ 0.30 $ 0.22 $ 0.64 $ 0.44
Cumulative effect of change in
accounting principle -- -- (0.13) --
------- ------- --------- --------
Diluted earnings per common share $ 0.30 $ 0.22 $ 0.52 $ 0.44
======= ======= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements
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RARE Hospitality International, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Unearned
Compensation Total
Common Stock -Restricted Retained Treasury Shareholders'
Shares Amount Stock Earnings Stock Equity
------ ------ ----- -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 27, 1998 12,077 $105,092 $(478) $16,752 $ (748) $ 120,618
Net earnings -- -- -- 2,586 -- 2,586
Purchase of Treasury Stock -- -- -- -- (1,139) (1,139)
Issuance of shares pursuant
to exercise of stock
options 9 84 -- -- -- 84
Amortization of restricted
stock -- -- 36 -- -- 36
------ -------- ----- ------- ------- ---------
Balance, March 28, 1999 12,086 105,176 (442) 19,338 (1,887) 122,185
Net earnings -- -- -- 3,811 -- 3,811
Amortization of restricted
stock -- -- 36 -- -- 36
Issuance of shares pursuant
to purchase of joint
venture interest 25 578 -- -- -- 578
Issuance of shares pursuant
to exercise of stock
options 97 1,229 -- -- -- 1,229
------ -------- ----- ------- ------- ---------
Balance, June 27, 1999 12,208 $106,983 $(406) $23,149 $(1,887) $ 127,839
====== ======== ===== ======= ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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RARE Hospitality International, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------
June 27, June 28,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 6,397 $ 5,339
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 8,070 9,350
Changes in working capital accounts (3,119) (6,888)
Cumulative change in accounting principle 1,587 --
Minority interest 903 692
Preopening costs -- (972)
Deferred tax (benefit) expense (81) 500
-------- --------
Net cash provided by operating
activities 13,757 8,021
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (13,036) (10,144)
Purchase of joint venture and franchise interests (191) --
-------- --------
Net cash used in investing activities (13,227) (10,144)
-------- --------
Cash flows from financing activities:
Repayments on revolving credit facilities (9,000) (3,000)
Proceeds from minority partners' contributions 1,241 1,664
Distributions to minority partners (1,296) (1,718)
(Decrease in) increase in bank overdraft included in
accounts payable and accrued liabilities (936) 6,507
Principal payments on capital leases (26) (94)
Purchase of common shares for treasury (1,139) --
Proceeds from exercise of stock options 1,313 327
-------- --------
Net cash (used in) provided by financing
activities (9,843) 3,686
-------- --------
Net increase (decrease) in cash and cash equivalents (9,313) 1,563
Cash and cash equivalents, beginning of period 12,060 1,752
-------- --------
Cash and cash equivalents, end of period $ 2,747 $ 3,315
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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RARE Hospitality International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The consolidated financial statements of RARE Hospitality International, Inc.
and subsidiaries (the "Company") as of June 27, 1999 and December 27, 1998 and
for the quarters and six-month periods ended June 27, 1999 and June 28, 1998
have been prepared by the Company, pursuant to the rules and regulations of the
Securities and Exchange Commission. The information furnished herein reflects
all adjustments (consisting of normal recurring accruals and adjustments) which
are, in the opinion of management, necessary to fairly present the operating
results for the respective periods. Certain information and footnote disclosures
normally presented in annual financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to such
rules and regulations. These financial statements should be read in conjunction
with the consolidated financial statements and notes thereto contained in the
Company's annual report on Form 10-K for the year ended December 27, 1998.
2. Cumulative Effect of Change in Accounting Principle
At the beginning of fiscal 1999, the Company adopted AICPA Statement of Position
98-5, "Reporting the Cost of Start-Up Activities." This statement requires
entities to expense start-up costs as they are incurred. The Company previously
amortized start-up costs over a 12-month period, as was the practice in the
restaurant industry. As a result of the adoption of this change in accounting
policy, the Company recorded a cumulative effect charge of $2.3 million
(approximately $1.6 million net of tax benefit, or $0.13 per diluted share)
during the first quarter of 1999.
3. Acquisition of Joint Venture Interest
In May 1999, the Company acquired the ownership interest of its joint venture
partner in four LongHorn Steakhouse restaurants located in the Columbus, Ohio
market for an aggregate purchase price of $750,000; comprised of 25,000 shares
of Company Common Stock, $150,000 in cash and a $30,000 note, in a transaction
accounted for under the purchase method. The excess of the purchase price over
the book value of the minority interest acquired was approximately $750,000 and
was recorded as goodwill to be amortized over 20 years.
4. Income Taxes
Income tax expense for the six months ended June 27, 1999 has been provided for
based on the estimated effective tax rate then currently expected to be
applicable for the full 1999 fiscal year. The effective income tax rate of 33.0%
for the six months ended June 27, 1999 differs from the statutory federal income
tax rate of 35% primarily due to employee FICA tip tax credits (a reduction in
income tax expense), partially offset by state income taxes.
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5. Long-Term Debt
At June 27, 1999, $39.0 million was outstanding under the Company's $100.0
million revolving credit agreement at a weighted average interest rate equal to
6.58%.
6. Earnings Per Common Share
Basic earnings per common share equals net earnings divided by the weighted
average number of common shares outstanding and does not include the dilutive
effect of stock options or restricted stock. Diluted earnings per common share
equals net earnings divided by the weighted average number of common shares
outstanding, after giving effect to dilutive stock options and restricted stock.
A reconciliation between basic and diluted weighted average shares outstanding
and the related earnings per share calculation is presented below (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
6 Months Ended
-----------------------------
June 27, June 28,
1999 1998
---------- ----------
<S> <C> <C>
Basic weighted average
shares outstanding 11,950 11,995
Dilutive effect of stock options 440 73
Dilutive effect of restricted stock 21 --
---------- ----------
Diluted weighted average shares outstanding 12,411 12,068
========== ==========
Earnings before cumulative effect of change in
accounting principle $ 7,984 $ 5,339
Cumulative effect of change in accounting
principle (net of tax benefit) 1,587 --
---------- ----------
Net earnings $ 6,397 $ 5,339
========== ==========
Basic earnings per common share:
Basic earnings before cumulative effect of
change in accounting principle $ 0.67 $ 0.45
Cumulative effect of change in accounting
principle (0.13) --
---------- ----------
Basic earnings per common share $ 0.54 $ 0.45
========== ==========
Diluted earnings per common share:
Diluted earnings before cumulative effect
of change in accounting principle $ 0.64 $ 0.44
Cumulative effect of change in accounting
principle (0.13) --
---------- ----------
Diluted earnings per common share $ 0.52 $ 0.44
========== ==========
</TABLE>
6. Comprehensive Income
For the quarters and six month periods ended June 27, 1999 and June 28, 1998,
there was no difference between the Company's net earnings and comprehensive
income.
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7. Shareholder Equity
In 1998, the Company's Board of Directors authorized the Company to purchase up
to $5 million of its Common Stock, through open market transactions, block
purchases, or in privately negotiated transactions. As of June 27, 1999, the
Company has purchased an aggregate 144,500 shares of its Common Stock for a
total purchase price of $1,887,000(average price of $13.06 per share).
8. New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. This statement is effective for the Company for
periods beginning in fiscal year 2001. The Company believes that the adoption of
the provisions of SFAS No. 133 will not have a material effect on its financial
statements, based on current activities.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
REVENUES
The Company currently derives all of its revenues from restaurant sales and
franchise revenues. Total revenues increased 21.3% and 19.6% for the quarter and
six months ended June 27, 1999, respectively, as compared to the same periods of
the prior year.
For each of the Company's restaurant concepts, same store sales comparisons for
the quarter ended June 27, 1999, consist of sales at restaurants opened prior to
September 29, 1997.
LongHorn Steakhouse:
Sales in the LongHorn Steakhouse restaurants for the quarter and six months
ended June 27, 1999, increased 25.2% and 22.5%, respectively, as compared to the
same periods of the prior year. The increases reflect a 18.5% and 20.0% increase
in restaurant weeks in the quarter and six months ended June 27, 1999,
respectively, as compared to the same periods of the prior year, resulting from
an increase in the restaurant base from 96 LongHorn Steakhouse restaurants at
June 28, 1998 to 111 restaurants at June 27, 1999. Average weekly sales for all
LongHorn Steakhouse restaurants in the second quarter of 1999 were $45,140, a
9.4% increase over the comparable period in 1998. Same store sales for the
comparable LongHorn Steakhouse restaurants increased 6.2% in the second quarter
of 1999, as compared to the same period in 1998, primarily due to an increase in
customer counts.
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The Capital Grille:
Sales in The Capital Grille restaurants increased 15.8% and 18.5% for the
quarter and six months ended June 27, 1999, compared to the same periods in
1998. The increases reflect a 2.1% and 5.9% increase in restaurant weeks in the
quarter and six months ended June 27, 1999, respectively, as compared to the
same periods of the prior year, resulting from the third quarter 1998 opening of
one The Capital Grille restaurant and the fourth quarter 1998 closure of one The
Capital Grille restaurant. Average weekly sales for all The Capital Grille
restaurants in the second quarter of 1999 were $97,807, a 13.3% increase from
the comparable period in 1998. The increase in average weekly sales was
primarily due to an increase in customer counts and to a lesser extent due to
the closing of a lower than average unit volume restaurant that was included in
the second quarter 1998 average. Same store sales for the comparable The Capital
Grille restaurants increased 9.7% in the second quarter of 1999 as compared to
the same period in 1998, which is primarily attributable to an increase in
customer counts.
Bugaboo Creek Steak House:
Sales in the Bugaboo Creek Steak House restaurants for the quarter and six
months ended June 27, 1999 increased 11.4% and 10.3%, respectively, as compared
to the same periods of the prior year. The increases reflect a 12.8% and 9.4%
increase in restaurant weeks in the quarter and six months ended June 27, 1999,
respectively, as compared to the same periods of the prior year, resulting from
an increase in the restaurant base from 15 Bugaboo Creek Steak House restaurants
at June 28, 1998 to 17 restaurants at June 27, 1999. Average weekly sales for
all Bugaboo Creek Steak House restaurants in the second quarter of 1999 were
$60,692, a 1.2% decrease from the comparable period for 1998. Same store sales
for the comparable Bugaboo Creek Steak House restaurants in the second quarter
of 1999 decreased 5.5% as compared to the same period in 1998, primarily due to
an decrease in customer counts.
Company-wide:
Franchise revenues of approximately $54,000 and $79,000 for the quarter and the
six months ended June 27, 1999, respectively, were derived from a
franchisee-owned LongHorn Steakhouse restaurant, which opened in Puerto Rico in
September 1998.
COSTS AND EXPENSES
Cost of restaurant sales as a percentage of restaurant sales decreased to 35.8%
from 36.5% for the second quarter of 1999 and decreased to 35.8% from 36.8% for
the six months ended June 27, 1999, as compared to the respective periods of
1998. The decrease in cost of sales as a percentage of restaurant sales for the
quarter and six months ended June 27, 1999, was primarily due to favorable meat
purchasing contracts the majority of which continue through February 2000, and
decreases in beer, wine and liquor costs resulting from favorable price
negotiations with certain beer, wine and liquor vendors.
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Restaurant operating expenses as a percentage of restaurant sales increased to
45.0% from 44.6% for the second quarter of 1999 and to 44.6% from 44.3% for the
first six months of 1999 as compared to the respective periods for 1998. These
increases in operating expenses as a percentage of restaurant sales were due to
an increase in advertising expense, manager incentives and training expenses,
partially offset by greater leverage of fixed and semi-fixed expenses created by
an increase in average unit sales.
Restaurant depreciation and amortization decreased as a percentage of restaurant
sales compared to the corresponding periods of the prior year due to an increase
in average unit sales providing greater leverage of this fixed expense.
Due to the Company's adoption of AICPA Statement of Position 98-5, "Reporting
the Cost of Start-Up Activities" (SOP 98-5), pre-opening costs are expensed as
they are incurred effective as of the beginning of the first quarter of 1999.
Rather than restate prior periods for this change in accounting principle, the
cumulative effect of the change is shown net of tax benefit as a separate line
on the consolidated statement of earnings. Accordingly, the line on the
consolidated statement of earnings "pre-opening expense - restaurants" reflects
a comparison of amounts incurred and expensed in 1999 to pre-opening
amortization in the prior year.
General and administrative expenses as a percentage of total revenues remained
constant at 7.0% for the second quarter and 6.9% for the first six months of
1999 as compared to the respective periods of the prior year.
As a result of the relationships between revenues and expenses discussed above,
the Company's operating income increased to $7.0 million for the second quarter
of 1999 as compared to $4.7 million for the corresponding period of the prior
year.
Interest expense, net increased to $935 thousand in the second quarter of 1999,
from $627 thousand for the same period of the prior year, due to an increase in
the effective interest rate on borrowings and the amortization of loan costs
associated with the Company's revolving credit facility.
Minority interest expense increased to $412 thousand for the second quarter of
1999 from $285 thousand for the same period of the prior year primarily due to
improved operating results for the joint venture restaurants, partially offset
by a reduction in minority interest expense created by the purchase of a joint
venture partner's partnership interest in 11 joint venture restaurants during
the fourth quarter of 1998 and the purchase of a joint venture partner's
partnership interest in four joint venture restaurants in May 1999.
Income tax expense for the second quarter of 1999 was 32.7% of earnings before
income taxes bringing the Company's effective tax rate for the first six months
of 1999 to 33%. This compares to 30.1% of earnings before income taxes for the
second quarter and the first six months of 1998. The Company's effective income
tax rate differs from applying the statutory federal income tax rate of 35% to
earnings before income taxes primarily due to employee FICA tip tax credits (a
reduction of income tax expense), partially offset by state income taxes.
Net earnings increased 42.8% to $3.8 million for the second quarter of 1999 from
net earnings of $2.7 million for the second quarter of 1998, reflecting the net
effect of the items discussed above.
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Liquidity and Capital Resources:
The Company requires capital primarily for the development of new restaurants,
selected acquisitions and the remodeling of existing restaurants. During the
first six months of 1999, the Company's principal source of working capital was
cash provided by operating activities ($13.8 million). For the six months ended
June 27, 1999, the principal uses of working capital were capital expenditures
for new and improved facilities ($13.0 million) and the purchase of common
shares for treasury ($1.1 million). As of June 27, 1999, $39.0 million was
outstanding and $61.0 million was available under the Company's $100.0 million
revolving credit facility.
The Company intends to open 15 Company-owned and joint venture Longhorn
Steakhouse restaurants and two Bugaboo Creek Steak House restaurants in fiscal
year 1999. The Company estimates that its capital expenditures for fiscal year
1999 will be approximately $35-40 million. During the second quarter of 1999,
the Company opened four LongHorn Steakhouse restaurants, bringing the total
number of LongHorn Steakhouse restaurants opened during the first six months of
1999 to seven. Management believes that available cash, cash provided by
operations, and available borrowings under the Company's $100 million revolving
credit facility will provide sufficient funds to finance the Company's expansion
plans through the year 2000.
Since substantially all sales in the Company's restaurants are for cash, and
accounts payable are generally due in seven to 30 days, the Company operates
with little or negative working capital.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. This statement is effective for the Company for
periods beginning in fiscal year 2001. The Company believes that the adoption of
the provisions of SFAS No. 133 will not have a material effect on its financial
statements, based on current activities.
Impact of the Year 2000 Issue
Most hardware and software designed in the past was not designed to recognize
calendar dates beginning in the Year 2000. The failure of such hardware and
software to properly recognize the dates beginning in the Year 2000 could result
in miscalculations or system failures, which could result in an adverse effect
on the Company's operations.
The Company's key information technology systems, including its financial,
informational and operational systems ("IT Systems"), which are mainly comprised
of third party hardware and software, have been assessed and detailed plans have
been developed to address any remediation required before the end of 1999. The
Company is in the process of testing its IT Systems to determine Year 2000
readiness. Testing of the Company's IT Systems is over 80% complete and is
expected to be fully completed by September 1999. In addition, the Company is in
the process of assessing its non-IT systems that utilize embedded technology
such as microcontrollers and reviewing them for Year 2000 compliance. Assessment
of the Company's non-IT Systems is over 80% complete and is expected to be fully
completed by September 1999.
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<PAGE> 13
To operate its business, the Company relies upon its suppliers, distributors and
other third party service providers ("Material Providers"), over which it can
assert little control. The Company's ability to conduct its core business is
dependent upon the ability of these Material Providers to remediate their Year
2000 issues to the extent they affect the Company. If the Material Providers do
not appropriately remediate their Year 2000 issues or develop viable contingency
plans, the Company's ability to conduct its core business may be materially
impacted, which could result in a material adverse effect on the Company's
financial condition.
Where predictable, the Company is assessing and attempting to mitigate its risks
with respect to the failure of its Material Providers to be Year 2000 ready as
part of its ongoing contingency planning. The Company has requested all of its
Material Providers to provide information regarding their state of Year 2000
readiness. The process of following up with Material Providers who have not yet
responded and evaluating all responses is expected to be completed by September
30, 1999. Although the communications received by the Company from its Material
Providers, to date, have not disclosed any material Year 2000 issues, there can
be no assurance that these Material Providers will be Year 2000 ready on a
timely basis. Unanticipated failures or significant delays in furnishing
products or services by Material Providers could cause certain restaurants to
temporarily close or remove certain items from their menus, which could have a
material adverse effect on the Company's consolidated financial position,
results of operations and cash flows. If unanticipated problems arise from
systems or equipment, there could be material adverse effects on the Company's
consolidated financial position, results of operations and cash flows. As part
of the Year 2000 readiness efforts, the Company is developing contingency plans
to limit the year 2000 disruptions and financial loss that may occur in the
event of failures in the Company's or Material Provider's IT Systems or non-IT
systems. Contingency plans have been developed for all of the systems that have
been determined to be mission critical. The remainder of the contingency plans
are expected to be completed by September 1999, but will be modified as
additional information regarding possible failures becomes available.
The Company expenses costs associated with its Year 2000 system changes as the
costs are incurred, except for system change costs that the Company would
otherwise capitalize. The program, including testing and remediation of all of
the Company's systems and applications, the cost of external consultants, the
purchase of software and hardware, the development and implementation of viable
contingency plans, including the compensation of internal employees working on
Year 2000 projects, is expected to cost approximately $1,025,000 (except for
fringe benefits of internal employees, which are not separately tracked) from
inception in calendar year 1998 through completion in calendar year 1999. Of
these costs, approximately $100,000 was incurred (approximately $80,000 of which
was capitalized) during 1998, approximately $500,000 was incurred(approximately
$425,000 of which was capitalized)during the first six months of 1999 and
approximately $425,000 is expected to be incurred during the remainder of 1999
(approximately $375,000 of which is expected to be capitalized). However, the
Company is unable to estimate the additional costs that it may incur subsequent
to 1999 as a result of Year 2000 problems suffered by Material Providers, and
there can be no assurance that the Company will successfully address the Year
2000 problems present in its own IT Systems and non-IT systems.
Forward-Looking Statements
Statements contained in this Report concerning future results, performance or
expectations, including those regarding the opening of additional restaurants,
planned capital expenditures, the adequacy of the Company's
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capital resources, disclosures related to the effect of the advent of the year
2000 on the Company and its systems and other statements regarding trends
relating to various revenue and expense items, are forward looking statements.
These statements are subject to a number of risks and uncertainties, some of
which are beyond the Company's control that could cause the Company's actual
results to differ materially from those projected in such forward-looking
statements.
Actual results, performance or developments could differ materially from those
expressed or implied by those forward-looking statements as a result of known or
unknown risks, uncertainties and other factors, including those described from
time to time in the Company's filings with the Securities and Exchange
Commission, press releases and other communications. The Company undertakes no
obligation to update or revise forward-looking statements to reflect the
occurrence of unanticipated events or changes to future operating results over
time.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
As of June 27, 1999, $39.0 million was outstanding under the Company's $100.0
million revolving credit facility. Amounts outstanding under such credit
facility bear interest at LIBOR plus a margin of 1.25% to 2.0% (depending on the
Company's leverage ratio), or the administrative agent's prime rate of interest
plus a margin of 0% to 0.75% (depending on the Company's leverage ratio), at the
Company's option. Accordingly, the Company is exposed to the impact of interest
rate movements. To achieve the Company's objective of managing its exposure to
interest rate changes, the Company from time to time uses interest rate swaps.
The Company entered into an interest rate swap agreement with a commercial bank,
which effectively fixes the interest rate at 7.515% on $40.0 million of the
Company's borrowings through August 1999, decreasing to $35.0 million through
February 2000 and decreasing to $25.0 million through August 2001. The Company
is exposed to credit losses on this interest rate swap in the event of
counterparty non-performance, but does not anticipate any such losses.
While changes in LIBOR and the administrative agent's prime rate of interest
could affect the cost of borrowings under the credit facility in excess of
amounts covered by the interest rate swap agreement in the future, the Company
does not consider its current exposure to changes in such rates to be material.
The Company believes that the effect, if any, of reasonably possible near-term
changes in interest rates on the Company's financial condition, results of
operations or cash flows would not be material.
Investment Portfolio
The Company invests portions of its excess cash, if any, in highly liquid
investments. At June 27, 1999, the Company had approximately $2.7 million
invested in high-grade overnight repurchase agreements.
Part II - Other Information
Item 1. Legal Proceedings.
In January 1996, the Company and Moo Management, Inc. ("Moo") formed a joint
venture ("RTL Joint Venture") for the development of LongHorn
14
<PAGE> 15
Steakhouse restaurants. The parties never developed LongHorn Steakhouse
restaurants and, beginning in the fall of 1996, negotiated to amend their joint
venture agreement to develop Bugaboo Creek Steak House restaurants in an
expanded territory. While these negotiations were taking place, the parties
entered into a ground lease (the "Ground Lease") in the name of RTL Joint
Venture and the Company, with its own funds, subsequently built on the leased
premises a Bugaboo Creek Steak House restaurant. In the fall of 1997, the
negotiations between the Company and Moo broke down. The Company believes that
the parties did not reach a binding agreement to develop Bugaboo Creek Steak
House restaurants while Moo asserts that such an agreement was reached.
On, April 30, 1998, the Company filed a Petition for Declaratory Relief and
Contract Reformation styled RARE Hospitality International, Inc. v. Centercap
Associates, L.L.C. and Moo Management, Inc., C.A. No. 16350 NC in the Chancery
Court of New Castle County, Delaware seeking a determination that the Company,
and not RTL Joint Venture, is the tenant under the Ground Lease. In its amended
Answer and Counterclaim in this action, Moo alleged that the Company and Moo
agreed to the terms of a binding joint venture agreement to develop Bugaboo
Creek Steak House restaurants and entered into the Ground Lease in furtherance
thereof. In its Counterclaim, Moo alleged that the Company has breached the
alleged agreement and, as a result, Moo has been deprived of the profit that it
would have earned from the purchase and operation of three Bugaboo Creek Steak
House restaurants owned by the Company, has been damaged by the efforts
undertaken and the expenses incurred by Moo in preparation for performance of
the alleged joint venture agreement and has been deprived of the profits lost
and that would be lost as the result of the Company's failure to perform the
alleged joint venture agreement. Moo sought an unspecified amount of monetary
damages and the dismissal of the Company's petition.
Following a preliminary hearing in this matter held on December 18, 1998, this
action and the counterclaim were dismissed without prejudice.
On June 9, 1998, the Company filed a Demand for Arbitration with the American
Arbitration Association in Atlanta, Georgia styled RARE Hospitality
International, Inc. v. Moo Management, Inc., AAA Case no. 30418025798, and filed
an Amended Demand for Arbitration on July 7, 1998. In this arbitration, the
Company sought an immediate hearing and injunctive relief directing that the
Ground Lease be transferred to the Company and that Moo and its principals be
relieved from liability on the Ground Lease. The Company further requested an
award declaring that there is no joint venture or partnership between the
Company and Moo to develop Bugaboo Creek Steak House restaurants and granting
monetary damages for the Company's losses incurred as a result of the wrongful
conduct of Moo.
A hearing was held on July 23, 1998, with respect to the Company's request for
preliminary relief. On July 29, 1998, the arbitrator entered an Order
determining that the Company's request for preliminary injunctive relief was
subject to arbitration, that the arbitrator had jurisdiction to decide that
request and granting the Company's request for preliminary relief by ordering
Moo to sign on behalf of RTL Joint Venture an assignment of the Ground Lease to
the Company. The Company must also make an accounting to Moo on a monthly basis
of the operations of the Bugaboo Creek Steak House restaurant operated on the
Ground Lease until further order of the arbitrator.
On August 6, 1998, Moo filed an Answer and Counterclaim in the arbitration. In
its Answer and Counterclaim, Moo denies the Company's claim, alleges that the
Company has waived its right to arbitration and that the tribunal is without
jurisdiction to hear the matter, makes essentially the same
15
<PAGE> 16
counterclaims as contained in Moo's Answer and Counterclaim in the Delaware
action described above and seeks unspecified damages in an amount to be proven,
but not less than $5,000,000.
The week of December 7, 1998, an evidentiary hearing was conducted in the
arbitration with respect to only the issue of liability, if any, of the Company.
The hearing was continued and concluded with closing arguments on March 11,
1999. On May 26, 1999, the arbitrator rendered a decision on liability and ruled
that the Company and Moo did reach agreement to become partners in the
development of Bugaboo Creek Steak House restaurants in certain territories. The
arbitrator further ruled that the Company is liable to Moo for actual damages it
sustained, if any, from the Company's failure to perform the agreement. The
damages phase of the arbitration will continue with a hearing in November 1999,
at which time the Company intends to assert that no damages were sustained by
Moo as a result of the Company's failure to develop Bugaboo Creek Steak House
restaurants with Moo. It is anticipated that the arbitrator will render a
decision on damages following the hearing.
Management continues to believe that the Company's position has merit and that
the resolution of these matters will not have a material adverse effect on the
Company's financial condition or results of operations.
Item 2. Changes in Securities and Use of Proceeds.
On May 27, 1999, the Company issued 25,000 shares of its Common Stock, no par
value, to Denti Restaurant Group, Inc., in consideration for the assignment to
the Company of all right, title and interest of Denti Restaurant Group in the
Venture Manager Agreement dated as of January 1995, by and between Buckeye Steak
Ventures, a joint venture in which the Company is a partner, and Denti
Restaurant Group. The issuance of these securities to a single purchaser, the
sole shareholder of which is a management employee of the Company, was made in
reliance upon exemptions from registration under Section 4(2) of the Securities
Act of 1933 and of Regulation D of the Securities and Exchange Commission.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Securities Holders
The 1999 Annual Meeting of Shareholders of the Company was held on May 6, 1999,
at which the following proposals were voted upon by the shareholders (i) the
election of two directors in Class I to serve until the 2002 Annual Meeting of
Shareholders; and (ii) the ratification of the selection of KPMG LLP as the
Company's independent auditors for the fiscal year ending December 26, 1999.
Holders of 11,954,706 shares of the Company's common stock were entitled to vote
at that meeting.
The shareholders elected three directors in Class I with a term expiring at the
2002 Annual Meeting. As to each of the following named individuals, the holders
of the indicated number of shares of the Company's common stock voted for his
election and the holders of the indicated number of shares withheld authority to
vote for election and there were no broker non-votes:
<TABLE>
<CAPTION>
Shares Voting Shares Withholding
For Authority
Class I ------------- ------------------
<S> <C> <C>
George W. McKerrow, Sr. 10,093,971 70,417
Don L. Chapman 10,094,071 70,317
Lewis H. Jordan 10,094,071 70,317
</TABLE>
16
<PAGE> 17
The following directors' terms of office continue after the meeting and expire
at the annual meeting of shareholders in the year indicated.
<TABLE>
<S> <C>
Class II
Philip J. Hickey, Jr. 2000
George W. McKerrow, Jr. 2000
Class III
Ronald W. San Martin 2001
John G. Pawly 2001
</TABLE>
The selection of KPMG LLP as independent auditors for the Company for the fiscal
year ending December 26, 1999 was ratified as follows: 10,149,891 shares voted
in favor of the ratification; 10,918 shares voted against the ratification; and
3,579 shares abstained. There were no broker non-votes.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Filed.
27.1 - Financial Data Schedule (for SEC use only)
(b) Reports filed on Form 8-K.
None.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RARE Hospitality International, Inc.
Date: August 12, 1999 /s/ W. Douglas Benn
----------------- --------------------
W. Douglas Benn
Executive Vice President, Finance
and Chief Financial Officer
(Principal Financial
Officer and Chief Accounting
Officer, and a duly authorized
officer)
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q OF
RARE HOSPITALITY INTERNATIONAL, INC. FOR THE QUARTER ENDED JUNE 27, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-END> JUN-27-1999
<CASH> 2,747
<SECURITIES> 0
<RECEIVABLES> 3,069
<ALLOWANCES> 0
<INVENTORY> 9,768
<CURRENT-ASSETS> 27,309
<PP&E> 173,134<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 215,059
<CURRENT-LIABILITIES> 31,856
<BONDS> 48,706
0
0
<COMMON> 106,986
<OTHER-SE> 20,856
<TOTAL-LIABILITY-AND-EQUITY> 215,059
<SALES> 186,291
<TOTAL-REVENUES> 186,370
<CGS> 66,770
<TOTAL-COSTS> 157,276
<OTHER-EXPENSES> 14,320
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,962
<INCOME-PRETAX> 11,909
<INCOME-TAX> 3,925
<INCOME-CONTINUING> 7,984
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,587
<NET-INCOME> 6,397
<EPS-BASIC> 0.54
<EPS-DILUTED> 0.52
<FN>
<F1>ASSET VALUES REPRESENT NET AMOUNTS.
</FN>
</TABLE>
